Last week, CoinLab, a US based startup that got attention last month for being the first venture funded Bitcoin firm, announced that they were suing MtGox for $75 million due to breach of contact. The lawsuit stems back to a partnership that was agreed between the two firms in February. Under the terms of the deal, MtGox, the world’s largest Bitcoin exchange, which accounts for over 70% of total daily volumes being conducted through its trading venue, had granted CoinLab as its exclusive partner in the US and Canada.
In its case against MtGox, CoinLab is claiming that the exchange failed to provide data in regards to existing clients. Additionally, they accuse MtGox of continuing to market in the US and Canada, and failing to abide by their revenue share agreement; thereby breaching the partnership agreement between the two firms. According to CoinLab CEO, Peter Vessenes in his statement to clients, “what tipped us into filing the lawsuit was our complete inability to get MtGox to deliver on the few simple things left that were needed for customers to move over en-masse; we were often left just apologizing to our alpha customers while their own businesses suffered. I’m just not willing to put any of our customers in that position – if we can’t do a good job for you, I won’t promise that we can.”
Under the agreement from February, beginning March 29th, the servicing of both existing and new US and Canadian account holders would be conducted by CoinLab; thus providing faster deposit and withdrawals and local support for this market. On its part, CoinLab agreed not to partner with any other sources of liquidity for two years. To service local customers, CoinLab had entered a partnership with Silicon Valley Bank (SVB) for customer funds to be held at the bank. According to CoinLab, client funds with MtGox had been deposited at Asian and European financial institutions. Involving SVB offered a more efficient location for US and Canadian fund transfer. In addition, having similar time zones, transaction issues would be easier to track and handle. Also, SVB’s presence provided greater assurances that payment transfers were abiding by US financial regulations.
According to CoinLab, final transfer of US and Canadian accounts was to occur today, on May 6th. At that time, CoinLab customers accessing MtGox would see a ‘branded’ CoinLab/MtGox site.
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Mixed Opinion on Who Is to Blame
Following the lawsuit, there has been mixed reaction on who is to blame. Both firms are members of the Bitcoin Foundation, an industry network that was created to promote and standardize the currency. As such, it is assumed that there was ample possibilities for a non-court mediation to occur. Currently there are several theories passing around for what led to conflict.
When taking a look at the partnership, one could easily come to the conclusion that it very much was one-sided towards CoinLab. They basically got to grab the biggest market in a revenue share agreement. Therefore, there is a feeling that as the Bitcoin market began to take off this year (the partnership was announced in February, but was created in November 2012), MtGox had reservations as to the ‘money left of the table’ that they were losing by being partners with CoinLab. Therefore, this drove them to delay the implementation of the partnership to force a rewrite of the deal. It’s also possible that due to the spike in demand that MtGox received this year, their manpower led them to become unable to handle the transfer to CoinLab.
On CoinLab’s side, there are Bitcoin community members that are pointing fingers at them for failing to come to a compromise with MtGox after the market conditions took off. However, in their defense, with banks currently putting a squeeze on funds beings transferred back and forth to exchanges, CoinLab’s SVB ties brought greater clarity in regards to handling FinCen regulations.
Taking a different view, it’s possible that the deal collapsed due to the change in the Bitcoin market place since late last year. While MtGox is the heavyweight of exchanges, there has been an advance of innovation hitting the sector. We’ve already written about upcoming trading platform, exchange aggregator Coinsetter, as well as Kraken, a new US based exchange launched soon. Additionally, there are numerous other firms that are in their private beta stages and will soon come to market. As such, having sourced a venture backing, which brings its focus on returns, perhaps CoinLab didn’t want to sell itself short by being locked into one liquidity venue for two years. With innovation occurring quickly, it’s very possible that in two years time, CoinLab would find itself in a ‘catch up’ mode, rather than leading the market. Therefore, while MtGox may be feeling the pinch of a potential ‘one-sided’ deal, having the partnership end in divorce may be in the interest of both firms.